Thursday, July 10, 2008

Is it Me, or is it the World?

At the 2008 Spring Summit of Chief Executive Boards International, Bob Lawson, Ph.D. gave us a useful lesson in economics and the economic stimulus strategies of the Federal Reserve. Bob, a Professor of Economics at Capital University in Columbus, OH, put a complex topic in terms we as business owners could easily understand.

He was talking about the effects of Federal Reserve policy in managing the money supply, attempting to stimulate or slow the US economy, depending on the situation and their perception of the situation.

Bob likened loose monetary policy (providing additional liquidity to the economy, in an effort to stimulate economic activity) to "flying over in helicopters and dropping dollars out on the economy." Actually, what the Fed does in its economic stimulus efforts isn't far from that. That was the case as the Fed attempted to restore the economy after the 2000-2001 recession.

Bob went on to say that if you do what the Fed supposes you'll do when additional dollars fall out of helicopters into the economy, you'll expand your business -- more money available means more for customers to spend, and more business for you, right?

And then he said that if you behave that way, it could be just the wrong thing for you and your business to do. "Look around", he advised, "and see if everyone else in your business is doing great, just like you are." "If so, you can conclude that it's NOT some brilliant or innovative thing you're doing -- it's just that you're caught up in the same wave, perhaps externally driven by monetary policy or another outside force -- probably cyclical."

That being the case, Bob suggested, what you should do instead of expanding your business is just raise your prices by 20% (or some similarly aggressive percentage). You'll probably keep all the business you have, since demand is high and capacity is short. But you'll be coining money while you do so. No more debt, no more investment, no more employees, just lots more money. Pull it out of the business, and bank it.

One of our CEBI members went home and thought about that. He had wildly expanded his business during the 2003-2006 real estate "bubble" (or what we now recognize as a bubble) just like everyone else in his business. More employees, more investment, more debt, and then the painful downsizing of the business to survive the post-bubble aftermath.

He said "I went back and did the math, and Bob was exactly right -- if I had raised prices instead of expanding my business, I would be millions of dollars richer today."

Think about it. What works on the upside works on the downside, as well. If you're presently suffering the same business downturn as everyone else in your business, it's probably not you. So, what do you have to do to survive (not prosper) in the current situation? Trim debt, trim staff, sell assets if they're not productive. It's not likely that you'll do well in a downturn. Or that you'll "sell you way out of it." Sounds good, but really hard to do in a weak economy. You just want to be "still standing" when the economy turns. What's important is to keep your powder dry, keep your core staff and assets intact, and be ready when the inevitable upswing occurs to capitalize on that wave. If you need to trim staff or investment, do just what's necessary to keep the business whole.

Then, when the tide turns (and it always does), you'll be ready to capitalize on the upswing.
If, on the other hand, your business is booming right now, look around. If you're doing well, and most of your competition is not, go full bore on expanding, grabbing market share and attempting to dominate your market. Whatever you're doing is really working, and it's you, not a cyclical market trend that's making the difference.

If you've had some experience (good or bad) with economic and market cycles, or "bubbles", please click "Comments" below and share it with others.

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Terry Weaver

Chief Executive Boards International

864 527-5917

Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

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